Finance and Accounting

Finance and Accounting

Standard deviation in portfolio management: A look at Dubai Financial Markets Stocks

Your first task, as the newly recruited Portfolio Manager of Barclays Private Bank, is to investigate whether standard deviation can be used in portfolio analysis of different time horizons. More specifically, you want to assess whether using a proxy standard deviation is a good measure of the actual standard deviation of the selected stocks. This issue has been an important one, since the last few years have witnessed major global economic events like the global financial crisis and 9/11, and the CFO believes the proxy standard deviation being used in portfolios is not reflecting an accurate picture of the real risk in the portfolios.

Select a portfolio of two stocks in the DFM Stock Exchange.

Stock selection Criteria:

-The dataset frequency should be daily ranging from 15th September 2000 to 15th September 2012. (Some companies may not have data from 2000, so just choose the year after).

-All stocks should be from companies of diversified sectors.
To help you out, the CFO has broken your task into the following requirements:

Introduction: writea small introduction (one or two paragraphs) about the importance of measuring standard deviation and/or risk in portfolio risk management.

(A) Choose 2 stocks from various sectors from the Dubai Financial Markets. (www.dfm.ae) Provide some justifications as to your stock selection.

(B) Create your spreadsheet and calculate the standard deviation and mean of the returns. Provide a graph showing the standard deviation and return of each stock.

(C) Calculate the annualized returns and standard deviations of each stock. Provide two graphs, one showing how the annualized standard deviations and actual standard deviations differ, and the other how the annualized returns differ from the actual returns

(D) Analyze the effect of the global financial crisis which started on 15th September 2008 with
Lehman Brothers crash and how the use of annualized standard deviation provides an accurate proxy of the actual standard deviation.

(E) Repeat the parts (B, C, D) using monthly data instead of daily.

(F) Draw any conclusion which you think exist between frequency of data (monthly vs. daily), the proxy standard deviation, and actual standard deviation.

(G) Evaluate your project by recommending any other ways of measuring risk.

 

 

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